SRTs – The Best Kept Secret

How SRTs Work and Why They Matter for Banks

At their core, SRTs allow banks to transfer credit risk on selected loan portfolios without selling the assets outright. That means banks can keep client relationships intact, continue servicing the loans, and still achieve meaningful regulatory capital relief. With Basel 3.1 on the horizon and higher risk weights making capital heavy portfolios like commercial real estate loans more inefficient for banks, this flexibility is proving invaluable. It gives banks breathing room to keep lending while meeting supervisory expectations.

Why SRTs Appeal to Investors

For investors, SRTs provide an exciting opportunity. They provide access to institutionally originated portfolios, corporate, SME, real estate, and even consumer finance – sourced under strict bank underwriting standards. These exposures offer attractive risk adjusted returns, sitting between senior debt and equity in terms of risk, but with structural protections and ongoing bank servicing. It’s a way to gain diversification and yield without the operational complexity, and cost, of direct lending. In short, SRTs combine quality and performance in a way that’s hard to find elsewhere.

The scale of the opportunity is also significant. The European market alone represents hundreds of billions in underlying loans, with issuance growing year on year and new participants entering from banking, insurance and private capital sectors. SRTs are no longer a niche play, they’re a structural part of how banks manage capital and how investors access credit risk.

The Market’s Next Chapter

However, as SRT volumes grow, they deepen the links between banks and private credit investors. Many participants are credit funds, insurers, and pension managers – some using leverage or bank financing to boost returns. In a stress scenario, those links can transmit shocks both ways: margin calls on leveraged investors, liquidity squeezes if secondary markets freeze, and even step-in expectations for banks. Regulators from the ECB, BoE, and Basel Committee have warned that without strong transparency and governance, a tool designed to manage risk could end up amplifying it.

The market is expanding quickly, and investor appetite is strong. Structures vary, from unfunded guarantees to funded notes, and often involve blind-pool portfolios where confidentiality restrictions limit disclosure. That combination of growth, opacity, and leverage is why SRTs are no longer just a “best kept secret.” They’re becoming a critical node in the evolving bank/private credit ecosystem. The question now is whether the market can continue to scale safely, or whether it risks amplifying systemic shocks if governance and reporting don’t keep pace.

Those PE firms with established credit strategies will be familiar with SRTs. But for those less active in this space, it’s worth asking: do you realise that loans to your portfolio companies are almost certainly part of the SRT population? These transactions are not just technical structures, they represent risk and capital flows that now run through the core of the financial system.